IAS 2 – Inventories
Objective: to give the accounting treatment for Inventories, including cost determination and expense recognition.
Inventories will be stated in the amount of cost or realisable value the lower. Cost of Inventories include: purchase cost, conversion cost (materials, labor, and overhead) and cost to bring the inventory to its present location and condition. When inventory items that are not-interchangeable (103) specific cost to specific individual items are required. For inventory items that are interchangeable, cost is determined on either FIFO, or Average Basis, LIFO is not permitted. When inventories are sold, the amount that should be recognized as an expense is related to the period in which the revenue recognized.
The Differences and Similarities between US GAAP Law and IFRS
Similarities:
Both US GAAP and IFRS the accounting principles stated inventories at cost. And both define inventory as assets held for sale in the ordinary course of business, In the process of production for such sale, or to be consumed in the production of goods or services. Also under both US GAAP and IFRS the cost of inventory include all direct expenditures that is required to prepare the inventory for sale, including allocable overheads, while selling costs are excluded from the cost of inventories, as are most storage costs and general administrative costs.
Significant Differences:
IFRS | US Law GAAP | |
LIFO is prohibited. the same cost formula must be applied to all inventories in similar nature or in use to the entity. | LIFO is an acceptable method the same cost formula is not required to use on all inventories in similar nature or in use to the entity. | Costing methods |
IFRS | US Law GAAP | |
Inventory is carried at the lower of: (1) cost (2) Realizable value Realizable value: estimated of the net amounts of inventories that are expected to realize, This amount may be equal to fair value or not | Inventory is carried at the lower of: (1) cost (2) Market Market is defined as: current replacement cost as long as the market is not great than net realizable value- that is estimated selling price less costs of completion and sale. | Measurement |
Previously recognized impairment losses can be reversed up to the amount of the original impairment loss. | Any write down of inventory to: lower of cost or market price, cannot be reversed. | Reversal of Inventory write-downs |
Permanent markdown affect average gross margin use. Reduction of the carrying cost of inventory below the lower of cost or net realizable value is not allowed. | Permanent markdowns do not affect the gross margin, such markdowns; reduce the carrying cost of inventory to net realizable value. | Permanent inventory markdowns |
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